News and Market Analysis

Forex Update: North America Open
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The dollar has softened, and cyclical currencies have firmed as the MSCI Asia-Pacific equity index rallied
over 1% to its highest level since its inception in 1987. Japan’s Nikkei 225, which has been an investor
favourite in the ‘great rotation’ into cyclical stocks, resumed its outperformance, rallying over 2% to a
new best since 1991. Europe’s Stoxx 600 gained more than 0.7%, though remained shy of last week’s
eight-month high, and the S&P 500 E-mini rose by nearly 1%. GDP data out of Japan and industrial
production figures out of China reaffirmed a picture of stronger economic conditions compared to
recently prevailing expectations. A similar theme has been seen in the U.S., despite surging Covid cases
and Trump’s political machinations. This comes with Pfizer’s candidate Covid vaccine having given
investors confidence to look to a return normalcy in 2021. The circumstance of massive monetary and
fiscal stimulus, coupled with still low inflation, and commitment of the Fed and other central banks to
hold interests lower for longer, enhances the value of company earnings, which along with spare
capacity, which keeps costs low, is a potent bullish cocktail for stock markets. The DXY dollar index
ebbed to a one-week low at 92.47 while EUR-USD, which has a dominant weighting in the DXY index,
concurrently lifted to a one-week high at 1.1868. USD-JPY declined to a one-week low at 104.36, which
marked just over a 50% retrace of the strong gains seen last Monday during the initial height of the so called ‘Covid vaccine’ global equity market rally. Foreign investor demand for shares in large cap Japanese exporters creates demand for the yen, and the resultant currency exposure may or may not be
hedged out. The Japanese currency has still posted modest declines versus the euro and sterling, and
more pronounced declines against the dollar bloc currencies. The outperformers have been the
commodity and trade-exposed currencies, which include the dollar bloc. AUD-USD rallied 0.5% in
posting a five-day high at 0.7305. USD-CAD dropped to a four-day lows under 1.3100. Oil prices gained
over 2.5% to four-day highs.

EUR-USD lifted to a one-week high at 1.1868 on the back of a broad softening in the dollar, which in turn
tracked a fresh rally across global stock stock markets. We retain a bullish long-term view on the pairing,
which is underpinned by a bearish long-term view on the dollar, although this hinges on risk appetite
holding up in global markets. The dollar’s real effective exchange rate (as calculated by the BIS) remains
at historically rich levels, and we expect broad declines in the U.S. currency over the longer term as
investors seek higher yield value and growth opportunities around the world. The Fed’s inflation tolerant lower-for-longer policy rubric, and negative real interest rates in the U.S., are key adjacent considerations. As for the euro, the prevailing predicament of Covid-related restrictions and the impact
on growth and ECB policy may be not too conducive to a high-conviction bullish view of EUR-USD, and
accordingly this restrains our view about EUR-USD upside possibilities. This could change as and when
signs appear that the Covid crisis is overcome. The recent first joint EU offering of social bonds, which
will finance a jobs program, both attracted foreign capital and shored up the reputation of the euro, and
there are more issues to come.

The pound gained moderately against the dollar and euro before ebbing back. Brexit is front and centre.
The coming week was being touted as the ‘final final’ deadline for a future relationship deal to be
reached to allow time for the ratification process ahead of the UK’s departure from the common market
and customs union on January 1, but it has become clear that negotiations could be pushed further out
still. France’s EU minister said on Friday that a “fixed, scientific deadline” has never been set, but if this
happens after the end of November “we will be in trouble.” There is even the possibility for a ‘technical’
delay, though the political mood in the UK is against this, with Boris Johnson set on following through on
a fundamental manifesto promise after building up a notorious reputation for U-turning on policy
decisions this year. Another consideration is political developments, with the UK government’s director
of communications Lee Cain and prime minister advisor Dominic Cummings having left their positions.
The take on this is that this weakens the influence of the ideologically Brexit ‘Vote Leave’ campaign
members, meaning there could be a softer and more pragmatic attitude to Brexit. Johnson’s reset has
got off to a bad start, as he’s been forced into self isolation having come into contact with minister who
has been tested positive for Covid. There has still not been a breakthrough in negotiations between the
EU and UK. Evidently, given the pound’s performance, the prevailing market expectation remains that
there will be a last minute climbdown and the two sides will strike a deal, which is what we anticipate.
Both sides will have to make concessions if a deal is to be achieved. There is an axiom that all things
Brexit go down to the wire, and fitting this neither side has been willing, as yet, to make the first move in
the concession game. Too much is at stake for both sides — surely — for there to be a failure in
statesmanship. Given the emergence of pro-EU Biden as president elect in the U.S., news that Dominic
Cummings is out of Johnson’s administration, and the backdrop of the Covid crisis, the scene is set for a
deal to be made.

USD-JPY declined to a one-week low at 104.36, which marks just over a 50% retrace of the strong gains
seen last Monday during the initial height of the so-called ‘Covid vaccine’ global equity market rally.
Foreign investor demand for shares in large cap Japanese exporters creates demand for the yen, and the
resultant currency exposure may or may not be hedged out. The Japanese currency has still posted
modest declines versus the euro, sterling and dollar bloc currencies. Japan’s Nikkei, which has been an
investor favourite in the ‘great rotation’ into cyclical stocks, resumed its outperformance, rallying over
2% to a new best since 1991. The MSCI Asia-Pacific ex-Japan equity index rallied over 1% to its highest
level since its inception in 1987. Dividend yields in Japan are about 2.8%, better than to 2.2% return
offered by U.S. companies, according to analysts at Schroders, and are near to the 3.0% dividend return
found in many emerging markets. GDP data out of Japan and industrial production figures out of China
reaffirmed a picture of stronger economic conditions compared to recently prevailing expectations. The
mix of low interest rates, massive monetary and fiscal stimulus, along with spare capacity (which lowers
costs), is a potent bullish tonic for equity markets.